General Motors’ acquisition of AmeriCredit for $3.5 billion will help consumers with tarnished credit get loans, give dealers another borrowing option for their inventory and strengthen GM’s public stock offering, say people impacted by the proposed deal.

GM CEO Ed Whitacre said he expects the purchase to close by the end of this year.

GM’s separation from its former finance unit, GMAC, which is now called Ally Financial, left the automaker at a disadvantage in getting loan applications approved for sub-prime and non-prime customers. Ally, which does business as an online bank, can’t make those risky loans under federal banking regulations.

Fort Worth-based AmeriCredit, with loans totaling $9 billion from 800,000 retail customers, is much smaller than the lending operations of Ford, Toyota and Volkswagen.

But it’s enough to put GM back in the hunt for consumers whose credit scores have taken a hit from unemployment, medical bills or even foreclosure.

“If you don’t compete for those people someone else will,” said Mike Jackson, CEO of AutoNation, the nation’s largest automotive retailer.

GM, which had $23.3 billion in cash as of March 31, plans to pay $24.50 in cash for each AmeriCredit share, a 24% premium over its Wednesday closing price of $19.70.

Republican Sen. Charles Grassley of Iowa called on the Inspector General for the Troubled Asset Relief Program to explore how GM is acquiring another company rather than repaying taxpayers who are shareholders in GM.

“We are putting in place the foundation to sell more cars profitably,” said GM spokeswoman Renee Rashid-Merem. “That increases the value of our company and eventually the return to shareholders and taxpayers.”

Sub-prime loans accounted for 27% of all new vehicle purchases in the third-quarter of 2007, but most lenders but them back after the financial crisis of 2008. But in April and May, only 18% of sales went to sub-prime borrowers, said Melinda Zabritski, director of automotive credit for Experian Automotive.

As car sales rebound gradually, competitors with so-called captive finance subsidiaries can be more creative in financing buyers with lower credit scores, helping them capture more sales. Because they aren’t regulated as banks, they can take more risks.

They also can offer more leases, which also attract higher risk consumers who want to avoid large down payments. Leases accounted for only 7% of GM dealer transactions in the first half of the year. The industry average for the same period: 21%.

“There’s no downside in this deal for us,” said Gordon Stewart, who has a Chevrolet dealerships in Garden City.

“The question is how much sub-prime do we want to stimulate?” said Frank Ursomarso, a Buick-GMC dealer in Wilmington, Dela. “Because that’s what caused the problem to begin with.”

In the nine months ended March 31, 2010, AmeriCredit earned $135 million on revenue of nearly $1.2 billion.

GM is preparing to begin selling shares to investors by the end of this year, enabling the government to sell some of its stake.

DETROIT (Reuters) – General Motors Co. plans to buy auto finance company AmeriCredit Corp. for $3.5 billion in a cash deal financed by government bailout money and aimed at removing a major investor concern before a planned IPO.

The deal announced Thursday would give GM an in-house lending arm for the first time since it sold a controlling stake in GMAC in 2006 and a chance to compete with faster-growing rivals led by Ford Motor Co., by offering riskier forms of financing including subprime loans and leases.

The move also represents an admission that the go-it-alone strategy of past GM management had failed and a bet that the government-owned automaker can improve returns for taxpayers by drawing down part of the cash cushion left from its bailout.

Many GM dealers have complained that lack of financing options for consumers has cost them sales in a U.S. auto market stuck in a slow recovery.

Analysts said the AmeriCredit deal addresses a risk to GM's sales momentum as it prepares for a stock offering this year that is intended to lower the government's nearly 61 percent stake.

But by bringing financing back in-house, GM is also taking on risk by stepping back into an area that forced the automaker to take massive charges as recently as 2008.

"It is going to be much more beneficial for GM to have a captive finance arm when they go to do their IPO. Without it, it puts them at a disadvantage," said Autoconomy.com analyst Erich Merkle.

Mike Jackson, CEO of the No. 1 U.S. auto dealership group AutoNation, said the AmeriCredit deal shows that GM is executing on its turnaround plan.

"I have said it to anyone and everyone who would listen," Jackson told Reuters. "I wouldn't run an auto manufacturer without a captive finance company. I think it's that strategically crucial."

AmeriCredit, which has $9 billion in auto loans, would become the "core" of a new GM finance arm.

Other major automakers, including Ford Motor Co. and Toyota Motor Corp., have in-house financing arms they use to provide loans to dealers and car buyers, often at subsidized rates to help sell vehicles.

GM's move leaves Chrysler, controlled by Fiat S.p.A., as the only large automaker without a dedicated financing arm.

GM CEO Ed Whitacre said the automaker recognized it could not compete without owning its own lending arm. That reverses a stance that dates to 2006 when it was scrambling to raise cash under former CEO Rick Wagoner and sold control of GMAC.

"We were not as competitive as we could be, and it hurt our ability to meet rising demand for GM cars and trucks," Whitacre said. "Now we are going to fix that."

GM ended the first quarter with $36 billion in cash and securities. It will pay for AmeriCredit from that cash, funding left over from the Obama administration's $50 billion bailout.

U.S. officials have said they would not interfere with decisions by GM. A spokesman for the U.S. Treasury said the department had been notified in advance of the deal but played no role in it.

GM management moved to close the AmeriCredit deal quickly when it was presented, Whitacre said. GM expects the deal to close in the fourth quarter.

An earlier plan GM officials had considered would have seen the automaker take back the auto financing operations of GMAC, essentially combining parts of two government-owned firms.

Detroit-based GMAC, now known as Ally Financial, is 56-percent owned by the U.S. Treasury after the government injected $17 billion as part of a restructuring that also saw the finance company become a commercial bank.

'Building block' to IPO

GM CFO Chris Liddell said the deal would help GM repay its taxpayer investment by providing a "building block" toward a more successful IPO.

With Fort Worth, Texas,-based AmeriCredit operating as part of GM, the automaker expects to offer more loans to subprime buyers and to sell more vehicles on lease.

GM's lease rates as a share of sales will also rise from 7 percent closer to the 21 percent that the rest of the industry averages, he said.

The goal is to lift GM's U.S. sales, which trailed the industry in the first half. GM had 14 percent growth while U.S. sales jumped 17 percent.

Jesse Toprak, an analyst with market tracking firm TrueCar, estimates that about 25 million U.S. car shoppers have been pushed into the subprime credit category because of difficulties in restructuring their mortgages.

Most of those consumers could afford monthly auto payments if they could find financing at dealerships and those loans would be less risky than simple credit scores would suggest.

"I think this is a smart move by GM and if they get this right, they can see sales rise significantly," said Toprak.

A subprime borrower is generally defined as a customer with a credit score below 620. Such borrowers can account for up to 25 percent of car shoppers in some markets, dealers say.

Share this post

Link to post

Share on other sites

this is a good idea. Even before the financial mess GMAC wouldnt give you a loan or a lease if you didnt have a credit score over 680. If you start offering leases to people who have a 550 score watch how many more cars you sell. If it was me id offer credit to ANYONE as long as there are no prior auto repossesions.

AmeriCredit Corp. began in 1992 with a mission to provide subprime financing nationwide as an alternative to the portfolios of captive lenders that preferred prime-rated buyers and products of their parent auto makers.

But now, one of those auto makers, General Motors Co., is purchasing AmeriCredit for $3.5 billion in an effort to better reach subprime customers, making up nearly 30% of the U.S. credit market.

Since the auto maker emerged from bankruptcy last year, GM executives and dealers have fretted over the inability to finance customers with relatively low credit scores.

Acquiring AmeriCredit is expected to solve that problem. GMAC, no longer a GM subsidiary, has shown limited interest in being a subprime player.

Based in Fort Worth, TX, AmeriCredit filled a niche in the subprime market that accompanied the growth in vehicle leasing and expedited sales of vehicles.

It hasn’t always been easy. Chairman and co-founder Clifton Morris says the company experienced some troubling periods, especially when auto sales slumped.

But he adds: “We had a business model which endured even in recession periods when payment delinquencies and repossession rates grew. Dealers came to trust us for being so stable, as was the case in the GM and Chrysler bankruptcy periods.”

GM says one of the things that attracted it to AmeriCredit was the lender’s ability to operate under last year’s dire circumstances.

In the early years, AmeriCredit provided financing (at an interest rate of between 10% and 23%) to clients with credit scores of as low as 500, opening the door to customers who previously had been denied loans.

The company's revenues escalated in the 1990s and early 2000s, reaching annual revenues in the $2 billion to $3 billion range and net profits around $70 million as recently as 2008.

AmeriCredit pioneered opening local offices for auto-loan payments, although later it closed most of those branches to offset income shortfalls when vehicle sales declined.

“What’s good about AmeriCredit in their admirable dealer relations is promptness in paying,” says Gordon Stewart, owner of six GM dealerships in Florida and Michigan.

“When GMAC turned off the leasing tap in 2008 and raised the credit scores for qualifying for new vehicles in 2009, AmeriCredit was the only independent lender who took deals.”

AmeriCredit’s CEO and former chief financial officer, Daniel Berce, is one of many younger finance experts that have joined the company over the years.

Under Berce, AmeriCredit has boosted total assets to $16.5 billion and its GM dealer portfolio to about 5,000.

About 15% of AmeriCredit’s revenues come from GM dealers and their customers. Currently, most of the lender’s 800,000 accounts are with non-GM dealers. Berce says that will change with the firm’s new role as a GM captive.

GM Expects AmeriCredit Deal to Boost Sales

What convinced AmeriCredit to accept GM’s buyout offer and give up its status as the nation’s largest independent subprime lender?

The time was right and the offer too good to refuse, says Morris, one of AmeriCredit’s largest shareholder.

“You get only one chance to do something like teaming up with a powerhouse like GM, so we had to take it,” he tells Ward’s.

Share this post

Link to post

Share on other sites

Yep. Not a good idea. For a small amount of customers, maybe. Ohtherwise they will be getting quite a few carsback...

What's worrying is that GM people have been complaining about banks relaxing credit availability to subprime borrowers before. Are they that stupid that they don't understand the subprime issue brought about this financial crisis and put us close to a second Depression?